Overseas Headlines – September 13, 2018

Date: September 13, 2018

United States:

U.S. Core Inflation Unexpectedly Cools on Apparel, Medical Costs

A gauge of underlying U.S. inflation unexpectedly cooled in August as apparel prices fell by the most in about seven decades and medical-care costs declined, offering Americans a respite from accelerating price gains. Excluding volatile food and energy costs, the core consumer price index rose 2.2 percent in August from a year earlier, compared with the 2.4 percent median estimate of economists surveyed by Bloomberg News, a Labor Department report showed Thursday. The broader CPI slowed to a 2.7 percent annual gain from 2.9 percent. The cooling of price gains, along with what last week’s jobs report showed was the fastest wage increase since 2009, meant inflation-adjusted hourly pay rose 0.2 percent from a year earlier, following a 0.1 percent decline in August. The moderation in the core gauge partly reflects a 1.6 percent monthly drop in apparel prices, a component that tends to be volatile. Even so, the broader slowdown follows data showing a surprise drop in producer prices and suggests the path of inflation could be softer than expected. At the same time, freight prices and rising wages, along with tariffs and counter- levies, may keep putting upward pressure on inflation. Federal Reserve policy makers are widely expected to raise interest rates later this month, though a more persistent slowdown in inflation could affect their outlook for future increases. The core CPI rose 0.1 percent from the prior month, compared with the median estimate of economists for a 0.2 percent gain, and followed an annual increase of 2.4 percent in July. The broader CPI was up 0.2 percent, less than forecasts for a 0.3 percent increase. It was expected to rise 2.8 percent from a year earlier. Besides apparel, the index for medical care fell 0.2 percent for a second month. The shelter category, which accounts for about one-third of the CPI, showed a 0.3 percent gain, in line with recent increases. Prices of new automobiles were unchanged, the first month without a gain since April, while used cars and trucks rose 0.4 percent. Airfares rose 2.4 percent following a 2.7 percent advance in July, amid higher fuel prices, one of the biggest costs for airlines.

Europe:

Bank of England Keeps Rate Unchanged, Upgrades Growth Forecast

The Bank of England upgraded its view of the economy and noted recent strengthening pay, keeping officials on course for future series of gradual interest-rate increases. Policy makers said recent activity has been better than expected, raising their third-quarter estimate to 0.5 percent from 0.4 percent, according to minutes of their latest meeting at which they left rates on hold. Officials also noted that consumer spending and pay settlements appear to have been stronger than anticipated. But they reiterated that Brexit was the biggest challenge to the outlook and that uncertainty about the U.K.’s future outside the European Union had risen. With the government working on contingency plans for a no-deal Brexit, Governor Mark Carney has extended his stay at the BOE until early 2020. On Thursday, he even attended a Cabinet meeting to discuss preparations. At the BOE decision, the Monetary Policy Committee voted unanimously to hold the benchmark rate at 0.75 percent, after hiking at the last gathering in early August. The central bank reiterated that “limited” and “gradual” rate increases will be needed to control inflation, and investors see the next quarter-point increase arriving in May. It was the first meeting for the BOE’s newest policy maker Jonathan Haskel, an expert on productivity. The pound edged higher after the decision, before paring gains to trade little changed at $1.3051 as of 1:15 p.m. in London. The bank’s analysis of financial markets revealed that there had been an increase in interest-rate options bets on a central-bank interest-rate cut in 2019. Investors also see greater downside risks to the pound.

Asia:

Turkey Central Bank Raises Benchmark Rate to 24%; Lira Rallies

Turkey’s central bank raised its benchmark interest rate by the most since Recep Tayyip Erdogan came to power 15 years ago, countering the president’s call for lower borrowing costs just two hours before the decision was announced. The currency rallied. The Monetary Policy Committee led by Governor Murat Cetinkaya on Thursday increased the one-week repo rate by 625 basis points to 24 percent, more than the median estimate in a Bloomberg survey that called for a hike of 325 basis points. The bank’s decision came shortly after Erdogan triggered tumult by repeating his hostility to higher borrowing costs and issuing an order that limited the use of foreign currency in domestic transactions. The independence of monetary policy has been in doubt since Erdogan pledged in his election campaign this year to take on a greater role to bring interest rates lower. “Great decision — made all the more difficult by the huge pressure on the central bank from Erdogan,” said Bluebay Asset Management LLC strategist Tim Ash. “The Turks just gave themselves a chance to hold the lira and rebuild the trust of the market.” The lira rose after the decision and was trading 3.1 percent higher at 6.1604 per dollar at 2:23 p.m. in Istanbul. It has lost around 40 percent of its value this year. Turkey’s financial troubles have helped fuel an investor exodus from emerging markets in other regions — with the Argentine peso and the South African rand sliding. Rising U.S. interest rates have discouraged the riskier reach for yield, deepening home-grown crises.